On 1 October 2022, the new regime introduced into the Corporations Act through the Treasury Laws Amendment (Cost of Living Support and Other Measures) Act 2022 (Cth) to facilitate employee share schemes (New ESS Regime) took effect.
At the time of its introduction, the New ESS Regime was welcomed as a positive step towards providing more flexibility for employee share schemes for both listed and unlisted entities, replacing the relief previously provided under ASIC Class Orders 14/1000 (for listed entities) and 14/1001 (for unlisted entities).
Approximately 18 months down the track, we take a look at whether the New ESS Regime has lived up to its promise, and how listed and unlisted entities have adapted to the New ESS Regime.
Key observations on the practical impact of the New ESS Regime
Since the implementation of the New ESS Regime, we’ve seen two key trends:
- The New ESS Regime hasn’t had any material impact on listed entities. Although its made it easier for them to benefit from the relief provided by the regime where an offer does not require the payment of monetary consideration, this hasn’t changed their offer documents/approach in any significant way.
- Many unlisted entities are now moving towards ‘performance rights’ and ‘zero exercise priced options’ (ie, offers not requiring monetary consideration) given it is much easier to benefit from the relief granted under the New ESS Regime for these types of offers.
Further details on these trends and the reasons for them are outlined below.
Offers which do not require payment of monetary consideration
The most substantive change under the New ESS Regime was the simplification of the conditions required where an ESS participant is not required to pay monetary consideration to participate.
Put simply, the offer document simply needs to state that the offer is being made under the relevant division of the Corporations Act, and if the employee share scheme uses a trust, some updates to the trust deed may be required.
With this significant simplification of the conditions which need to be satisfied for offers which do not require the payment of monetary consideration (eg, performance rights or restricted shares granted for ‘free’), we have seen a significant and relatively seamless adoption of the New ESS Regime by entities using these sorts of employee share schemes.
However, although the ‘strict’ offer document requirements have been reduced, we have seen clients which make these types of offers continue to use the same documentation they used prior to the introduction of the New ESS Regime. That is because that documentation is helpful for participants and also generally contains helpful ‘warning disclosures’ and details of the offer which reduces the risk of misleading and deceptive conduct in connection with the ESS (which the New ESS Regime does not provide relief for).
Clients have also been appreciative of the reduced administrative burden as, unlike the previous ASIC Class Orders, there is now no longer a requirement to file documents with ASIC.
The main ‘friction’ we have seen in adopting the New ESS Regime for these types of offers is the requirement for some entities to amend their trust deeds to comply with the New ESS Regime.
Offers which require payment of monetary consideration
Under the New ESS Regime, offers which require payment of monetary consideration (eg, loan funded plans or share acquisition plans requiring payment) are still quite complicated.
For these offers to fall within the New ESS Regime, certain conditions need to be satisfied. These conditions include the need to prepare an ESS offer document and certain financial statements, the application of a new director liability regime applying to offer documents, requirements to update offer documents during the offer application period, caps on issuance, caps on total monetary outlay from participants, and requirements for loans provided under the plan (if any) to be interest free and limited recourse to the ESS interests (although in the case of listed entities, some of these conditions do not apply or apply to a lesser degree).
With the imposition of these conditions we have seen unlisted entities not seek to rely on the New ESS Regime to operate their employee share schemes which require monetary consideration. Instead, we see these clients rely on specific disclosure documents, on-sale, licensing, and other relief available under the Corporations Act.
A new frontier for offers to ‘disclosure exempt’ participants
The New ESS Regime also provides comprehensive relief to an entity relying on the existing senior manager or sophisticated investor exceptions under the Corporations Act, generally without the need to do anything else.
However, we have not seen a significant uptake or use of these provisions in the market although this relief is quite ‘generous’.
We have therefore been communicating to clients the benefits of qualifying participants as ‘disclosure exempt’ as this means the significant conditions imposed on employee share schemes which require the payment of monetary consideration do not apply even if, for example, a loan plan is used.
What’s missing?
Issues not ‘solved’ by the relief under the New ESS Regime
Although the New ESS Regime provides broad based relief from a number of securities law restrictions and issues, the regime is not a silver bullet.
In particular, it’s important to be mindful of other issues which may arise in the operation of employee share schemes including restrictions on providing financial assistance, restrictions on buying back shares, insider trading risks (described below), self-acquisition risks, termination benefits issues (for which we have seen increasing focus on the structure of default leaver provisions), and the lack of coverage/relief for offers of interests in certain types of trusts.
Insider trading risks
For ESS participants, especially in listed entities, insider trading risks continue to be an issue. While most listed entities try to deal with this issue by limiting ESS activities to ‘clean’ windows such as trading windows or immediately following the release of results, managing insider trading risks may still be difficult because of the broad range of activities required to operate a share scheme.
For example, the insider trading restrictions apply to entities offering ESS interests, participants applying for ESS interests, entities granting and vesting ESS interests, and participants exercising ESS interests.
Entities should therefore get specific advice on insider trading risks, including considering the establishment of information barrier arrangements, the use of ‘warehouse trusts’ (to acquire and stockpile shares in ‘clean’ periods only), the use of the equal information defence, and the use of specific ESS exceptions.
A reminder of additional changes following ASIC’s consultation on the New ESS Regime
Following parliament passing the New ESS Regime and in response to requests from stakeholders, ASIC released a consultation paper proposing to provide relief to remove some unintended technical issues in the New ESS Regime that may have made it hard for some entities to rely on the new regime.
Some of these unintended consequences included a drafting oversight which limited the scope of on-sale relief so shares issued under the New ESS Regime could generally only be sold within 12 months to other ESS participants (and not on the ‘open market’).
ASIC also received some feedback that foreign entities with employees in Australia may not be able to provide certain financial information required under the New ESS Regime and that the regime made salary sacrifice arrangements and loan plan arrangements difficult to implement.
Following this consultation, ASIC granted a relief instrument in December 2022 which introduced important changes, including to provide:
- A broader exemption for secondary sales to allow ESS participants in listed entities to on-sell shares received under the New ESS Regime in the ‘open market’ even if the sale occurs within 12 months of the grant of the shares;
- more options for foreign companies to provide financial information to ESS participants; and
- clarity around how the New ESS Regime applies to salary sacrifice and loan plans.
